UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the Transition Period From _ to __

Commission File Number
0-25424

SEMITOOL, INC.
(Exact Name of Registrant as Specifited in Its Charter)

Montana	81-0384392
(State or other jurisdiction of incorporation or organization)	I.R.S. Employer Identification No.)

Semitool, Inc.
655 West Reserve Drive, Kalispell, Montana 59901
(406) 752-2107
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The approximate aggregate market value of the voting stock held by non-affiliates of the registrant on December 17, 2001 (based on the last reported sale price on the Nasdaq National Market as of such date) was $183,045,784.

The number of shares of the registrant’s Common Stock, no par value, outstanding as of December 17, 2001 was 28,403,592.

DOCUMENTS INCORPORATED BY REFERENCE

There is incorporated by reference in Part III of this Annual Report on Form 10-K the information contained in the registrant’s definitive proxy statement for its annual meeting of shareholders to be held February 7, 2002.

PART I

Introduction - Forward-Looking Statements

Statements contained in this Annual Report on Form 10-K which are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements for purposes of these provisions, including without limitation, statements regarding trends in the semiconductor industry, our strategy to maintain and expand our technology leadership, the performance and acceptance of our products, strategic business development, manufacturing strategy, our vertical manufacturing integration, our innovation and leveraging of existing technologies, the pursuit of new and growing markets, including wafer level packaging, competition, patent filings, results from operations, the adequacy of manufacturing facilities, the ability to finance activities, and the ability to maintain worldwide sales, service and customer support. Other forward-looking statements include those regarding use of sales, service and support organizations, the contribution of international sales to net sales, fiscal 2002 sales, gross margins, research and development, cost of manufacturing, interest expense, future balance, the sufficiency of funds, and effects of new accounting standards, which are detailed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact,” “continue,” or the negative thereof or other comparable terminology.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include, but are not limited to, the cyclical nature of the semiconductor industry in general, lack of market acceptance for new products, decreasing demand for our existing products, impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraint difficulties and other risks detailed under the heading “Risk Factors” and elsewhere herein.

Our future results will depend on our ability to continue to enhance our existing products, to develop and manufacture new products and to finance such activities. There can be no assurance that we will be successful in the introduction, marketing and cost-effective manufacture of any new products or that we will be able to develop and introduce in a timely manner new products or enhancements to our existing products and processes which satisfy customer needs or achieve widespread market acceptance. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

Item 1. Business

Overview

Semitool was organized in 1979 and is a worldwide leader in the design, development, manufacture and support of high performance wet chemical processing equipment for use in fabrication of semiconductor devices. Our primary suites of tools are electrochemical deposition systems for the plating of copper interconnects for integrated circuits, systems for the electrochemical deposition of other metals for various applications, including semiconductor wafer level packaging, and wafer surface preparation systems for cleaning, stripping and etching processes. These suites of technologically innovative multi-wafer batch and single-wafer processing tools leverage our core wet chemical processing expertise and our experience building and supporting production-proven semiconductor fabrication equipment.

With more than 22 years dedicated to the semiconductor and related industries, we have applied our wet chemical expertise in design, engineering, process and manufacturing to deliver innovative equipment and processes for electrochemical deposition and wafer surface preparation to our global customer base. Our customers include many of the major semiconductor device and wafer level packaging manufacturers worldwide.

Industry Background

Semiconductor devices, commonly called integrated circuits, or ICs, consist of components, typically millions of microscopic transistors, which are interconnected with metal circuitry to form the functional IC. Fabrication of an IC involves between 300 to 500 complex and repetitive process steps, involving an array of manufacturing equipment and chemical media. ICs are fabricated on substrates, or wafers, made of a semiconductor material, most commonly silicon. The fabrication process involves the deposition of multiple layers of insulating and conducting films, along with cleaning, stripping and etching processes throughout the fabrication to prepare the surface for the next step. There can be up to 30 ultra-thin, patterned layers in an IC. After the fabrication sequence, the wafer may contain several hundred ICs. Traditionally, individual ICs are derived from the wafer by a process involving extremely fine sawing, or dicing, after which the wafer is cleaved into separate ICs. The IC is then “packaged” by electrically connecting it to pins via metal wires or contacts to allow insertion into an electronic device, and encapsulating the IC into a polymer package. New technologies such as wafer lever packaging, package the IC while still in the wafer state, allowing for the automated packaging of many IC’s simultaneously.

Electronic systems require increasingly complex ICs that operate at higher performance levels, while at the same time using less power and generating less heat. Fabrication of such advanced ICs requires increases in the number of fabrication and packaging process steps, a reduction in device feature sizes, as well as innovations in IC fabrication processes and manufacturing equipment.

Trends in Semiconductor Manufacturing

Development of Smaller Feature Geometries. The development of smaller feature geometries, 0.10 micron and below, enables device manufacturers to improve performance, reduce device size and produce a greater number of ICs per wafer. Yet as device geometry line widths decrease, manufacturing yields become increasingly sensitive to the magnitude of processing defects.

Transition to Copper. Aluminum alloys have traditionally been used to connect the millions of transistors that make up each IC. As devices and features are reduced in size, and device performance requirements increase, an electrical conductor with superior conductivity is needed, and copper has evolved as a replacement to aluminum interconnects in certain advanced ICs. Copper, however, cannot be deposited reliably by traditional vacuum-based systems as they are used with aluminum. Electrochemical deposition is an effective method to reliably and uniformly deposit copper. In addition to the device performance benefits, copper electrochemical deposition also results in lower cost and fewer manufacturing steps.

Migration to 300mm Wafers. The migration to a larger 300mm (12 inch) wafer size from the common 200mm (8 inch) wafer size lowers the manufacturing cost per IC by increasing the number of ICs per wafer. Processing larger wafers requires the acquisition of specialized equipment by IC manufacturers. Most 300mm wafer processing cannot be performed on previous generations of equipment, necessitating the purchase of new systems. The migration to 300mm has begun on a limited basis and is expected to accelerate in the next several years.

Wafer Level Packaging. Advanced packaging technologies include chip-scale packaging which requires a package only slightly larger than the IC. Wafer level packaging uses chip-scale technology and attaches the package to the ICs before the wafers are diced. A key advantage of wafer level packaging is that a whole wafer is processed simultaneously instead of the sequential processing typical in traditional wire bonding packaging of single ICs. These new process methods use specialized single-wafer and multi-wafer batch wet chemical processing equipment similar to those used in front-end manufacturing of ICs.

Electrochemical Deposition

Deposition is a key step in the fabrication of ICs. It is a process in which a thin film of a material such as aluminum or copper is deposited on the surface of the wafer. Traditional deposition methods used to deposit aluminum such as physical vapor deposition (PVD) and chemical vapor deposition (CVD) have not effectively or efficiently deposited copper on a wafer for interconnects. Furthermore, these processes require large amounts of energy, need to work under high vacuum and require expensive, ultra-purified consumables.

In contrast, electrochemical deposition (ECD), a wet chemical process, deposits a thin film of metal onto semiconductor wafers in a process chamber at room pressure and temperature. This process does not require the expense and time needed when using an ultra-high vacuum environment and, in the case of copper plating, results in the deposition of a uniform film of copper metal on the wafer. The nature of electrochemical reactions allows for metals to be deposited resulting in final films of higher purity than that of the starting materials used in the reaction. In addition to copper deposition, electrochemical deposition can also be used for a variety of other applications, including gold bumps and interconnects for communication IC devices, solder bumps for IC packaging and platinum deposition for capacitors in memory circuits.

Cleaning, Stripping and Etching Processes

Cleaning, stripping, etching or otherwise conditioning the surface of the wafer are critical steps in the semiconductor fabrication process. Traditionally, these wet chemical processing steps have been accomplished using wet benches. Wet benches have process limitations, including inconsistent processing across the surface of each wafer, lower throughput per square foot and particle contamination of the wafers. Particle contamination, in particular, arises because contaminants are easily transferred to the surface of processed wafers as they are moved in and out of the liquid-filled chambers. This contamination decreases yield and increases the cost of the fabrication process.

In contrast, spray tools used in the cleaning, stripping and etching processes subject wafers to sequential spray applications of chemicals while the wafers are spun at high speeds on its axis inside an enclosed process chamber. This technology enables precise and uniform application of process chemicals, enhanced process reliability because of reduced particle contamination, and shortened process cycle times. Enhanced process reliability and reduced particle contamination are increasingly critical as IC complexity increases the number of wafer conditioning steps during the fabrication process, as new materials, such as copper, which are hazardous to other parts of the fabrication process, are introduced through plating, and as shrinking geometries link ever smaller contamination levels to IC failure.

Wafer Level Packaging

Wafer level packaging utilizes IC manufacturing’s front-end processes, including electroplating, solvent resist stripping, metal etching, and cleaning. Electrochemical deposition equipment is used for redistribution and wafer bumping processes that produce the solder bumps that in turn connect the IC to its package. Wafer etching, cleaning, and stripping processes are used in conjunction with redistribution and bumping, and also for other processes, primarily photo-resist removal and under-bump metallurgy etching steps.

The Semitool Solution

Semitool leverages its extensive experience with wet chemical processing equipment to offer a suite of tools used by semiconductor device manufacturers to perform various processes in the fabrication of integrated circuits and the packaging of ICs. As described below, our tools provide solutions in a wide range of applications related primarily to either electrochemical deposition or cleaning, stripping and etching.

Electrochemical Deposition Solutions. Our Paragon, LT210c and Equinox suite of electrochemical deposition systems incorporates proprietary plating technology that operates at room temperature and pressure and enables precisely controlled deposition films on a device-side down semiconductor wafer. These tools are based upon a flexible, modular design and can be used in a number of different configurations providing flexibility and manufacturing line balancing. In addition, there are several types of process chambers, including seed layer repair, anneal and cleaning, that can be integrated into each of these tools resulting in a broad range of applications of our core technology. We introduced the first high-throughput copper plating tool in calendar year 1994 and continue to develop innovative electrochemical deposition solutions. In addition to copper interconnects, our plating equipment is also used for a variety of other applications, including gold bumps and interconnects for communications ICs, solder bumps for wafer level packaging and platinum deposition for capacitors in memory circuits.

Multi-Wafer Batch Cleaning, Stripping and Etching Solutions. Our Spectrum suite of automated cleaning, stripping and etching equipment uses spray technology that we developed to process up to 50 wafers per batch. Our tools spin the wafers in a carrier rotated on its axis inside an enclosed process chamber and expose the wafers to a sequenced spray of chemicals. This spray technology enables precise and uniform application of process chemicals and enhanced process reliability because of reduced particle contamination and shortened process cycle times. In addition, our batch platforms deliver our proprietary, cost-effective cleaning process, called HydrOzone. This process uses a spray of deionized water and ozone gas as a cleaning agent in place of the costly and environmentally harmful chemical solutions traditionally relied upon for cleaning semiconductor wafers. HydrOzone’s cleaning rate is also faster than traditional methods.

Single-Wafer, Cleaning, Stripping and Etching Solutions. Our Capsule cleaning chamber enables precise, side-selective application of chemicals to a wafer enclosed in a controlled chamber. Capsule process chambers can be integrated into the configuration of our deposition tools or clustered on our linear platform as our Millennium single-wafer cleaning tool to provide both side-selective and wafer edge cleaning. The capsule effectively removes copper and other contaminants hazardous to subsequent steps in the IC fabrication process from the back, bevel and edges of the wafer.

Strategy

Our objective is to be the leading provider of innovative wet chemical processing equipment to semiconductor manufacturers worldwide. Our business strategy incorporates the following key elements:

Maintain and Expand Technology Leadership. We intend to continue investing in research and development to maintain and expand our position as a technological leader. We believe that our proprietary electrochemical deposition systems, principally for the plating of interconnects and solder bumps, and wafer cleaning, stripping and etching systems, provide us with a technological advantage over competing wet chemical semiconductor processing equipment. We believe that our technologies provide our customers with critical performance, quality, process control and cost benefits. We further believe that technical innovations will continue to be one of the leading drivers for market acceptance of new semiconductor processing equipment.

Offer a Broad Range of Products Incorporating Innovative Wet Processing Technologies. We offer a broad range of differentiated products, including electrochemical deposition equipment and cleaning, stripping and etching tools to semiconductor manufacturers for use in diverse process applications. Since development and introduction in 1979 of our first product, the SRD, or Spin Rinser/Dryer, we have continued to enhance and expand our product offering to support the evolving needs of the semiconductor manufacturing industry.

Leverage Process Technologies Across Markets and Applications. Our technology and manufacturing expertise enables us to offer solutions to manufacturers of other products, such as wafer level packaging, thin film heads and hard disk media used for disk drives, MEMS, or micro electromechanical systems, and ink jet print heads that use fabrication processes similar to those used by semiconductor manufacturers.

Capitalize on Design and Manufacturing Expertise. We intend to continue to identify those design and manufacturing functions which add value to our products. We believe we posses a number of competitive advantages from our internal design capabilities and selective vertical manufacturing integration, including the ability to achieve cost and quality benefits, and to quickly bring new products and product enhancements to market.

Products

Semitool’s broad product suite of high performance, technologically innovative processing tools leverages our core wet chemical processing know-how and more than two decades of experience building and supporting production-proven semiconductor manufacturing equipment. Our primary wet chemical processing solutions are electrochemical deposition equipment, primarily for the plating of copper, gold and solder, multi-wafer batch and single-wafer cleaning, stripping and etching equipment and wafer transport container cleaning equipment. All of these solutions leverage and extend our core spin-spray technologies that apply process chemicals to wafers spun on their axes at high speed inside an enclosed process chamber.

The following table summarizes our product suites:


                                   Calendar Year of                                             Approximate Price
           Products                  Introduction             Principal Applications             Range Per Tool
- --------------------------------   ----------------          ------------------------          -------------------
                                                                                                 (in thousands)
Electrochemical Deposition (EDC)
     Paragon                             2000                     Electroplating                  $1,900-$3,900
     LT 210c                             1998                     Electroplating                  $1,250-$3,100
     Equinox                             1994                     Electroplating                   $250-$1,900
     ACMS XT                             2001             Electroplating Chemical Management        $400-$700

Multi-Wafer Batch Cleaning,
Stripping and Etching
   Automated
     Spectrum                            1998                   Clean, Strip, Etch                $1,400-$2,600
   Semi-Automated
     Scepter SAT                         2001                   Clean, Strip, Etch                  $650-$900
     Scepter SST                         2000                      Clean, Strip                     $550-$800
     Scepter SRD                         2000                          Clean                        $50-$100
     SAT                                 1981                   Clean, Strip, Etch                 $250-$1,100
     SST                                 1980                      Clean, Strip                    $250-$1,000
     SRD                                 1979                          Clean                        $15-$100

Single-Wafer Cleaning, Stripping
and Etching
     Millennium                          1998                   Clean, Strip, Etch                $1,350-$3,200
     Equinox                             1986                   Clean, Strip, Etch                 $250-$1,600

Wafer Transport Container
Cleaning
     Storm                               1988                   Container Cleaning                  $150-$550

Electrochemical Deposition Products

Paragon: The automated Paragon is designed for high volume manufacturing and is available in both 200mm and 300mm configurations and can integrate several process steps related to ECD seed layer deposition repair, ECD bulk fill, wafer back-side, bevel and edge clean and rapid thermal anneal. Its advanced plating chamber, the CFD2, provides increased control of the film deposition thickness contour across the wafer. This allows the user to optimize plating results for downstream operations such as better matching of film characteristics to chemical-mechanical planarization equipment, resulting in reduced processing times. It uses a newly developed automation system common to our Millennium and uses our most advanced software and control system that was designed for i300i compliance. Due to the modularity of the platform, the Paragon can be offered in various configurations with up to 14 process chambers allowing the customer to configure the process chamber mix to meet their specific needs. The primary application for the Paragon is semiconductor quality metal film depositions such as copper, gold, solder, platinum and nickel. The Paragon is a bridge tool, which enables it to process 200 or 300mm wafers.

LT210c: The LT210c 200mm deposition system offers up to ten process chambers for plating and capsule cleaning, and utilizes robotics for wafer handling. The combination of its small size, multiple chambers and dual robots results in a highly productive system for high volume manufacturing operations. The primary application for the LT 210c is in copper deposition, but the system also deposits gold, platinum, solder and nickel alloys.

Equinox: The Equinox system is an automated, single-wafer processor for low to medium production volumes and for research and development activities. This system is offered with up to six process chambers and utilizes robotic wafer handling. It is offered in 200mm wafer size for electrochemical deposition of copper, gold, platinum, solder and nickel alloys.

ACMS: The Advanced Chemical Management System is an automated electroplating bath control unit. It maintains the desired chemical balance in the plating baths by automatically analyzing and replenishing the chemical constituents for up to four Paragon, LT210c and Equinox systems. The primary applications for the ACMS are copper and solder alloy deposition.

Batch Cleaning, Stripping and Etching Products

Spectrum: The Spectrum, our most advanced automated multi-wafer batch process tool, is a compact modular system designed for high volume manufacturing. The Spectrum incorporates our most advanced software and control systems and can include both spray and immersion processing modules. It is dedicated to specific cleaning, stripping and etching processes, including polymer removal, photo resist stripping, critical cleans and our proprietary HydrOzone process which uses deionized water, and ozone gas to replace sulfuric acid based processes. The Spectrum is designed for wafers up to 300mm in size.

SAT: The SAT, or Spray Acid Tool, applies corrosive and caustic process media to semiconductor wafers for removal of various contaminants, including particles, metals, organic material, oxides and chemical films. It also provides extremely uniform etching performance. The SAT is a manually loaded semi-automated system, processing batches of 25 wafers and performing sequential processing whereby the process media is delivered to the semiconductor wafers as a spray. It is offered in one, two and three chamber models. Our HydrOzone process can also be used on the SAT platform. The SAT is designed for wafers up to 300mm in size.

SST: The SST, or Spray Solvent Tool, applies solvent process media to semiconductor wafers for removal of photoresist, etch polymers, polyimides and organic contaminants. The SST performs sequential processing, by applying solvents and rinse agents, such as deionized water, for cleaning, and nitrogen gas for drying. This manually loaded semi-automated system processes batches of 25 wafers at a time. It is offered in one and two process chamber models. The SST is designed for wafers up to 300mm in size.

SRD: The SRD, or Spin Rinser/Dryer, is a highly efficient cleaning system utilizing DI water to remove chemical residue, particles, and other water-removable contaminants. The SRD provides Dl cleaning with minimal amounts of water, in a small footprint tool. It is offered in one, two and three chamber models and processes wafers in batches of 25. The SRD is designed for wafers up to 300mm in size.

The Scepter products have double the wafer capacity of our standard SAT, SST and SRD while using approximately the same amount of clean room space. This provides an existing fab the ability to increase throughput without adding space. The Scepter is designed for wafers up to 300mm in size.

Single-Wafer Cleaning, Stripping, and Etching Products

Millennium: The Millennium is an advanced single-wafer processor with up to ten process chambers and wafer handling robotics. This system incorporates our Capsule side-selective processing chamber and can also be equipped with spray, immersion and vapor process chambers for addressing a wide range of high volume, leading edge applications. The Millennium is designed for wafers up to 300mm in size.

Equinox: The Equinox system allows for the combination of caustics, corrosives and solvents in a single cluster tool for cleaning, stripping and etching processes. Suitable for low to medium production volumes and for research and development applications, this system is offered with up to six process chambers and utilizes a single-wafer handling robot. The Equinox is designed for wafers up to 200mm in size.

Wafer Transport Container Cleaning

Storm: The Storm is a single chamber system and is used for cleaning wafer transport containers which is a key factor in fab contamination control. It processes multiple containers simultaneously, offering high productivity in a space efficient system. The Storm is available for cleaning wafer transport containers designed for up to 300mm wafers.

Wafer Level Packaging

Wafer level packaging, which is a back-end fabrication process, uses some of the same or similar products used in front-end wafer fabrication. Our products that are used in wafer level packaging include the Paragon, LT210c and Equinox for metal plating, the Spectrum, SAT, SST and SRD for cleaning and stripping processes and the Millennium and Equinox for metal etches.

Customers, Sales and Marketing

Our customers include leading worldwide semiconductor manufacturers. The following is a representative list in alphabetical order of our largest United States and international customers:


Advanced Micro Devices              IBM                        Sanyo
Agilent                             Intel                      Seagate
Alpha Industries                    Lucent Technologies        Sony
Chartered Silicon Partners          Micron                     STMicroelectronics
Dominion/Flash Semiconductor        Motorola                   Systems on Silicon Manufacturing
FASL                                Nan Ya Technologies        Texas Instruments
Fujitsu                             NEC                        Triquint Semiconductor
Hewlett Packard                     Nortel Networks            United Microelectronics
Hynix                               Philips                    Unitive Electronics

International sales, primarily in Europe, Asia and Japan, accounted for approximately 63.8%, 58.0% and 52.8% of consolidated net sales for fiscal 2001, 2000 and 1999, respectively. We have direct sales and customer support organizations located in Japan, Singapore and Korea, and for some products, independent distributors serving Japan and Taiwan and independent sales representatives serving China and Taiwan. To enhance our sales capabilities, we maintain demonstration and process development laboratories at our facility in Kalispell, Montana and a demonstration laboratory in Japan. We market and sell our products in the United States through our sales organization which includes direct sales personnel and a limited use of independent sales representatives for specified product lines.

Field service personnel and application engineers located in the United States, Europe, Japan and Asia, provide warranty service, post-warranty service and equipment installation. Field service engineers are located at 17 sites throughout the world, including dedicated site-specific engineers at certain customer locations pursuant to customer agreements. To further ensure customer satisfaction, we also provide service and maintenance training, as well as process application training for our customers’ personnel on a fee basis. We maintain an inventory of spare parts strategically located throughout the world, which allows us to provide same day or overnight delivery in most instances.

Backlog and Deferred Revenue

Consolidated orders backlog decreased 64.8% to $38.8 million at September 30, 2001, from approximately $110.2 million at September 30, 2000. At September 30, 2001, semiconductor equipment orders represented 100% of consolidated orders backlog compared with 92.9% at September 30, 2000.

We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next twelve months. Orders are generally subject to cancellation or rescheduling by customers with limited or no cancellation fees. As the result of systems ordered and shipped in the same quarter, possible changes in customer delivery dates, cancellations and shipment delays, the backlog at any particular date and the new orders bookings for any particular period are not necessarily indicative of actual revenue for any succeeding period. In particular, during periods of downturns in the semiconductor industry we have experienced cancellations and significant delays.

Deferred revenue relates to equipment shipped to customers and will be recognized as sales upon equipment acceptance by the customer. At September 30, 2001 deferred revenue was $38.2 million, a decrease of 33.9% as compared to deferred revenue of $57.8 million at October 1, 2000. Deferred revenue is not included in backlog. We expect to recognize all of this deferred revenue in fiscal 2002.

Manufacturing

Most of the semiconductor equipment manufacturing is conducted at our facilities located in Kalispell, Montana. Our manufacturing operations include metals and plastics fabrication and finishing capabilities; component parts and final product assembly; and extensive product testing capabilities. Manufacturing personnel work closely with product development engineers to ensure that products are engineered for manufacturability, affording a smooth transition from prototype to full scale production. Component and product prototyping is performed internally.

Research and Development

The market for semiconductor equipment is characterized by rapid technological change and product innovation. We believe that continued timely development of products is necessary to remain competitive. Therefore, we devote significant resources to programs directed at developing new and enhanced products, as well as new applications for existing products. We maintain extensive demonstration and process development laboratories at our facilities in Montana, including a clean room for testing and developing products. Research and development personnel work directly with customers to provide process solutions, develop new processes and to design and evaluate new equipment.

Expenditures for research and development, which are expensed as incurred, were approximately $27.5 million in fiscal 2001, $23.4 million in fiscal 2000 and $20.9 million in fiscal 1999. These expenditures as a percentage of our net sales represented approximately 10.7% in fiscal 2001, 9.8% in fiscal 2000 and 17.0% in fiscal 1999.

Competition

The semiconductor equipment industry is an intensively competitive market place marked by constant technological changes. We face substantial competition from established competitors, some of which have greater financial, marketing, technical and other resources, broader product lines, more extensive customer support capabilities, and larger sales organizations and installed customer bases.

Our primary competitors in electrochemical deposition include Applied Materials, Inc., Novellus Systems, Inc., and Ebara Corporation. Our primary competitors in cleaning, stripping and etching processes include FSI International, Inc., Tokyo Electron, Ltd., Verteq, Inc., Mattson Technologies and wet bench manufacturers. We believe that we compete favorably with these manufacturers on the basis of price, technology, cost of ownership and support. However, some of these competitors have significantly greater capital resources that they can bring to bear, which may give them the advantages that are described above.

We may also face competition from new market entrants. Significant competitive factors in the semiconductor equipment market and other markets, in which we compete, include system performance and flexibility, cost of ownership, the size of each manufacturer’s installed customer base, customer service and support capabilities and breadth of product lines. In order to remain competitive, we must maintain a high level of investment in research and development, marketing and customer service while controlling operating expenses. There can be no assurance that we will have sufficient resources to continue to make such investments or that our products will continue to be viewed as competitive as a result of technological advances by competitors or changes in semiconductor processing technology. Our competitors may also increase their efforts to gain and retain market share through competitive pricing. Such competitive pressures may necessitate significant price reductions by us or result in lost orders which could harm our business, financial condition, results of operations and cash flows. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These combinations may provide such competitors and potential competitors with a competitive advantage over us by enabling them to more rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers are relatively large companies that require global support and service for their semiconductor manufacturing equipment. Our larger competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers.

We expect our competitors to continue to improve the design and performance of their products. There can be no assurance that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price, performance and/or cost of ownership features, or that new processes or technologies will not emerge that render our products less competitive or obsolete. As a result of the substantial investment required to integrate capital equipment into a production line, we believe that once a manufacturer has selected certain capital equipment from a particular vendor, there is a tendency for the manufacturer to rely upon that vendor to provide equipment for the specific production line application and may seek to rely upon that vendor to meet other capital equipment requirements. Accordingly, we may be at a competitive disadvantage for a protracted period of time with respect to a particular customer if that customer utilizes a competitor’s manufacturing equipment. There can be no assurance that we will be able to compete successfully in the future.

Patents and Other Intellectual Property

We place a strong emphasis on the technically innovative features of our products and, where available, we generally seek patent protection for those features. We currently hold 123 U.S. patents, some with pending foreign counterparts, have 163 U.S. patent applications pending and intend to file additional patent applications as we deem appropriate. There can be no assurance that patents will be issued from any of our pending applications or that existing or future patents will be sufficiently broad to protect our technology. While we attempt to protect our intellectual property rights through patents, copyrights and non-disclosure agreements, there can be no assurance that we will be able to protect our technology, or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect our intellectual property to the same extent as the laws of the United States. Moreover, there can be no assurance that our existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide meaningful competitive advantages to us. In any of such events, our business, financial condition, results of operations and cash flows could be harmed.

In addition, we rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, employees may breach these agreements, and we may not have adequate remedies for any breach. In any case, others may come to know about or determine our trade secrets through a variety of methods.

From time to time, we receive letters invitations to take a license to other parties’ patents. We evaluate these invitations on a case-by-case basis. Offers such as these may lead to litigation if we reject the opportunity to obtain the license and the offeror claims infringement.

Employees

At September 30, 2001, we had 1,141 full-time and temporary employees worldwide. None of our employees are represented by a labor union, and we have never experienced a work stoppage or strike. We consider our employee relations to be good.

Environmental Matters

We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous waste. Our compliance with federal, state and local provisions regulating the discharge of materials into the environment, and the remedial actions we have taken with respect to environmental regulations, have not had, and are not expected to have, a material effect on our business, financial condition, result of operations and cash flows.

Risk Factors

Set forth below are risks and uncertainties that could negatively impact our business, financial condition, results of operations and cash flows, and could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K.

Cyclicality in the semiconductor industry has historically led to substantial decreases in demand for our systems and may from time to time continue to do so.

Our operating results are subject to significant variation due to the cyclical nature of the semiconductor industry. Our business depends upon the capital expenditures of semiconductor manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. The semiconductor industry experienced a downturn during 1998 and 1999 which seriously harmed our operating results for those periods. Typically, the semiconductor equipment industry has experienced a more pronounced percentage decrease in revenues than the semiconductor industry as a whole.

The semiconductor device and equipment industry is currently in a downturn that is greater than the 1998-1999 downturn.

There are indications that the semiconductor industry may continue to be depressed in fiscal 2002, and:

the semiconductor industry may experience other, possibly more severe and prolonged, downturns in the future;

any recovery of the semiconductor industry may not result in an increased demand by semiconductor manufacturers for capital equipment or our products; and

the semiconductor industry may continue to decline.

The downturn in the semiconductor industry, or any failure of that industry to fully recover from this downturn, will harm our business, financial condition, results of operations and cash flows.

Our operating results have in the past varied and probably will continue to vary significantly in the future from quarter to quarter, causing volatility in our stock price.

Our quarterly operating results have varied significantly in the past and may continue to do so in the future, which could cause our common stock price to decline. Some of the factors that may influence our operating results and subject our common stock to extreme price and volume fluctuations include:

changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor industry;

demand for products that use semiconductors;

market acceptance of our systems and those of our customers and changes in our product offerings;

the timing, cancellation or delay of customer orders and shipments;

product development costs, including research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and

the levels of our fixed expenses relative to our net sales.

In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly. As a result, declines in net sales could harm our business, financial condition, results of operations and cash flows.

Our net sales may vary significantly from quarter to quarter due to relatively small fluctuations in our unit sales.

During any quarter, a significant portion of our net sales may be derived from the sale of a relatively small number of systems. For example, our multi-wafer batch processing tools range in price from approximately $15,000 to $2.6 million per tool and our single-wafer processing tools for cleaning, stripping and etching and electrochemical deposition tools range in price from $250,000 to $3.2 million per tool. Accordingly, a small change in the number of tools we sell may also cause significant changes in our operating results. This, in turn, could cause fluctuations in the market price of our common stock.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.

Variations in the length of our sales cycles could cause our net sales, and thus our business, financial condition, results of operations and cash flows, to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate many of our products before committing to a purchase. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems. The length of time it takes us to make a sale depends upon many factors, including:

the efforts of our sales force and our independent sales representatives and distributors;

the complexity of the customer's fabrication processes;

the internal technical capabilities and sophistication of the customer; and

capital spending by our customers.

Because of the number of factors influencing the sales cycle, the period between our initial contact with a potential customer and the time when we recognize revenue from that customer, if ever, varies widely in length. Our sales cycle typically ranges from one month to two years. Occasionally our sales cycle can be longer, particularly with our international customers. The subsequent build cycle, or the time it takes us to build a product to customer specifications after receiving an order, typically ranges from one to six months. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.

When a customer purchases one of our systems, that customer often evaluates the performance of the system for a lengthy period before considering the purchase of more systems. The number of additional products a customer may purchase from us, if any, often times depends on many factors, including a customer’s capacity requirements. The period between a customer’s initial purchase and subsequent purchases, if any, often varies from two to twelve months or longer, and variations in length of this period could cause further fluctuations in our business, financial condition, results of operations, cash flows, and possibly our stock price.

Rapid technological change could make our products obsolete or unmarketable for specific applications.

We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in customer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. As a result, we expect to continue to make significant investments in research and development. Although, historically, we have had adequate funds from operations to devote to research and development, there can be no assurance that such funds will be available in the future or, if available, that they will be adequate. Also, we must manage product transitions successfully, since announcements or introductions of new products by us or our competitors could adversely affect sales of our existing products and cause these existing products to become obsolete or unmarketable for specific purposes. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products on a timely basis or in a manner which satisfies customer needs or achieves widespread market acceptance. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or allow a competitor to achieve greater market share. The failure to adjust to rapid technological change could harm our business, financial condition, results of operations and cash flows.

Our electrochemical deposition products may become obsolete or technological changes may reduce or limit increases in equipment consumption.

Our business is to a large extent affected by the adoption of our suite of electrochemical deposition tools, primarily for interconnects and wafer level plating applications. Accordingly, our business would suffer if these products became obsolete or if sales of these products decreased. Our success depends on our ability to keep pace with technological changes and advances in the semiconductor industry and to adapt and improve our products in response to evolving customer needs and industry trends. Since its inception the semiconductor industry has experienced rapid technological change in the design, manufacture, performance and application of ICs and these changes are expected to continue in the future. Therefore, one or more developments in the semiconductor industry may render our products obsolete or less important to the IC manufacturing process, including:

increased competition from new or existing competitors who produce electrochemical deposition equipment;

the adoption of a new process for fabricating interconnects on ICs; and

advances in deposition technology that make it possible to deposit metals, such as copper, gold or solder without our electrochemical deposition process.

Failure of our products to gain market acceptance would adversely affect our financial condition and to provide customer service and support.

We believe that our growth prospects depend upon our ability to gain customer acceptance of our products and technology. Market acceptance of products depends upon numerous factors, including compatibility with existing manufacturing processes and products, perceived advantages over competing products and the level of customer service available to support such products. Moreover, manufacturers often rely on a limited number of equipment vendors to meet their manufacturing equipment needs. As a result, market acceptance of our products may be adversely affected to the extent potential customers utilize a competitor’s manufacturing equipment. There can be no assurance that growth in sales of new products will continue or that we will be successful in obtaining broad market acceptance of our systems and technology.

We expect to spend a significant amount of time and resources to develop new systems and refine existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of any new systems. Our ability to commercially introduce and successfully market any new systems is subject to a wide variety of challenges during this development cycle, including start up bugs, design defects and other matters that could delay introduction in these systems to the marketplace. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that do materialize may be cancelled. As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales of our systems in order to recoup research and development expenditures. The failure of any of our new products to achieve market acceptance would harm our business, financial condition, result of operations and cash flows.

Our ability to reduce costs is limited by our ongoing need to invest in research and development.

Our industry is characterized by the need for continued investment in research and development as well as customer service and support. As a result of our need to maintain our spending levels in these areas, our operating results could be materially harmed if our net sales fall below expectations. In addition, because of our emphasis on research and development and technological innovation, our operating costs may increase further in the future.

If the semiconductor industry fails to broadly accept copper as a replacement for aluminum as the wiring choice for advanced semiconductor devices, our copper plating products may not achieve market acceptance.

Industries that use semiconductors are demanding increasingly complex, higher performance devices. Traditionally, semiconductor devices have used aluminum alloys to connect the transistors. However, we believe that as interconnects become increasingly smaller, copper is evolving as a replacement for aluminum as the wiring choice for advanced ICs. Our plating products are designed for plating copper on the wafer for copper interconnects and for cleaning the wafer after the plating process. If the semiconductor industry does not transition to copper interconnects, our copper plating and associated cleaning products may not achieve market acceptance or profitability.

Intense competition in the markets in which we operate may reduce the demand for our products.

The markets in which we compete are highly competitive. We face substantial competition from established competitors, some of which have:

greater financial, marketing, technical and other resources;

broader product lines;

more extensive customer support capabilities; and

larger sales organizations and customer bases.

Compliance with environmental regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business.

We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals. Current or future regulations could require us to purchase expensive equipment or to incur other substantial expenses to comply with environmental regulations. Any failure by us to control the use of, or adequately restrict the discharge or disposal of, hazardous substances could subject us to future liabilities, result in fines being imposed on us, or result in the suspension of production or cessation of our manufacturing operations.

Due to our significant level of international sales, we are subject to operational, financial and political risks such as currency fluctuations, unexpected changes in regulatory requirements, tariffs, political and economic instability, adverse tax consequences, outbreaks of hostilities and difficulties in managing foreign sales representatives and staffing foreign branch operations.

Our net sales attributable to customers outside the United States as a percentage of our total net sales were approximately 63.8% in fiscal 2001, 58.0% in fiscal 2000 and 52.8% in fiscal 1999. We expect net sales outside the United States to continue to represent a significant portion of our future net sales. Sales to customers outside the United States are subject to various risks, including:

exposure to currency fluctuations and related derivatives used to hedge such fluctuations;

political and economic instability, including terrorism;

unexpected changes in regulatory requirements in each of the countries outside the United States in which we operate;

tariffs and other market barriers in each of the countries outside the United States in which we operate;

potentially adverse tax consequences in each of the countries outside the United States in which we operate;

outbreaks of hostilities, particularly in Israel and Korea;

difficulties in managing foreign sales representatives and distributors in each of the countries outside the United States in which we operate; and

difficulties in staffing and managing foreign branch operations in each of the countries outside the United States in which we operate.

In addition, because a majority of our international sales are denominated in U.S. Dollars, our ability to compete overseas could be adversely affected by a strengthening U.S. Dollar. Moreover, although we endeavor to meet technical standards established by foreign standards setting organizations, there can be no assurance that we will be able to comply with changes in foreign standards in the future. Our inability to design products to comply with foreign standards or any significant or prolonged decline in our international sales could harm our business, financial condition, results of operations and cash flows.

If the protection of our proprietary rights is inadequate, our business could be harmed.

We place a strong emphasis on the technically innovative features of our products and, where available, we generally seek patent protection for those features. We currently hold 123 U.S. patents, some with pending foreign counterparts, have 163 U.S. patent applications pending and intend to file additional patent applications as we deem appropriate. There can be no assurance that patents will issue from any of our pending applications or that existing or future patents will be sufficiently broad to protect our technology. While we attempt to protect our intellectual property rights through patents, copyrights and non-disclosure agreements, there can be no assurance that we will be able to protect our technology, or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect our intellectual property to the same extent as the laws of the United States. Moreover, there can be no assurance that our existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide meaningful competitive advantages to us. In any of such events, our business, financial condition, results of operations and cash flows could be harmed.

There has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. We currently are involved in patent litigation which is described in “Legal Proceedings”. Although we are not aware of any infringement by our products of any patents or proprietary rights of others (other than as alleged by Novellus, Inc. in current litigation), further commercialization of our products could provoke claims of infringement from third parties. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any such litigation, including the litigation in which we currently are engaged, could result in substantial cost and diversion of effort by us, which by itself could have a material adverse effect on our financial condition, results of operations and cash flows. Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities and damages to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could harm our business, financial condition, results of operations and cash flows.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States.

In fiscal 2001, approximately 64% of our net sales was derived from sales in foreign countries, including certain countries in Asia such as Japan, Korea and Taiwan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems. For example, Taiwan is not a signatory to the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. In Taiwan, the publication of a patent prior to its filing would invalidate the ability of a company to obtain a patent. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent prosecution process, the contents of a patent are published upon filing which provides competitors an advanced view of the contents of a patent application prior to the establishment of patent rights. There is a risk that our means of protecting our proprietary rights may not be adequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.

We depend on our key customers.

Our ten largest customers accounted for approximately 39% of net sales in fiscal 2001, 48% in fiscal 2000 and 51% in fiscal 1999. We do not expect our reliance on our largest customers to change significantly. Although the composition of our largest customers has changed from year to year, the loss of, or a significant curtailment of purchases by, one or more of our key customers or the delay or cancellation of a large order could cause our net sales to decline significantly which would harm our business, financial condition, results of operations and cash flows. Similarly, delays in payments by key customers could have a significant impact on our cash flows.

There is a limited number of mostly large companies operating in the highly concentrated, capital intensive semiconductor industry. Accordingly, we expect that we will continue to depend on a small number of large companies for a significant portion of our net sales. In addition, as large semiconductor manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.

Our dependence on key suppliers could delay shipments and increase our costs.

Some components and subassemblies included in our products are obtained from a single source or a limited group of suppliers. The loss of, or disruption in, shipments from these sole or limited source suppliers could in the short-term adversely affect our business and results of operations. Further, a significant increase in the price of one or more of these components could harm our business, financial condition, results of operations and cash flows.

Anti-takeover provisions in our charter documents could adversely affect the rights of the holders of our common stock.

The anti-takeover provisions of Montana law and our Articles of Incorporation and Bylaws may make a change of control of Semitool difficult, even if a change of control would be beneficial to our shareholders. Our Articles of Incorporation authorize our Board of Directors to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of preferred stock and to fix the number of shares constituting any series and the designations of such series, without further vote or action by the shareholders. Although we have no present plans to issue any preferred stock, we view the authorized preferred stock as a financing vehicle. In addition, under Montana law and our charter documents, our Board of Directors may adopt additional anti-takeover measures in the future.

Any anti-takeover provisions, including any issuance of preferred stock, could have the effect of discouraging a third party from making a tender offer or otherwise attempting to gain control of us. In addition, these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

Competitive conditions in our industry may lead to increased price competition or loss of market share for our products.

Due to intense competitive conditions in the semiconductor equipment industry, we have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. Our competitors are likely to announce the introduction of new products or lower prices which will affect the prices of our systems and the level of discounts we grant our customers. To the extent that any of our semiconductor equipment systems are not distinguished from those of our competitors by significant technological advantages, we may experience increased price competition or loss of market share with respect to those systems.

We must attract and retain key personnel to help direct and support our future growth. Competition for such personnel in our industry can be high.

Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel, particularly our Chairman, President and Chief Executive Officer Raymon F. Thompson, who would be extremely difficult to replace, could harm our business and operating results. We do not have key person life insurance on any of our executives. In addition, at times in our industry, we have often experienced significant employee attrition, and we may experience further attrition due to the current downturn. Further, to support future growth, we will need to attract and retain additional qualified employees. Competition for such personnel can be intense, and we may not be successful in attracting and retaining qualified senior executives and other employees.

We manufacture substantially all of our equipment at a single facility, and any prolonged disruption in the operations of that facility could have a material adverse effect on our net sales.

We manufacture substantially all of our equipment in our primary manufacturing facility located in Kalispell, Montana. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our net sales could suffer a material adverse effect.

We rely upon independent sales representatives for a significant portion of our sales, and a disruption in our relationships with these representatives could have a negative impact on our sales in China, Japan and Taiwan.

Historically, a substantial portion of our sales have been made through independent sales representatives and distributors in China, Japan and Taiwan. We expect that sales through independent sales representatives and distributors will represent a material portion of our sales for the next several years. In particular, all our sales in China and Taiwan and some sales in Japan will continue to be made through independent sales representatives and distributors for the next several years. In some locations, our independent sales representatives also provide field service to our customers. The activities of these representatives are generally not within our control. A reduction in the sales or service efforts or financial viability of any of our independent sales representatives and distributors, or a deterioration or termination of any of our relationships with them, could harm our net sales, our financial results and our ability to support our customers.

Since a substantial portion of our net sales are derived from sales in foreign countries that are denominated in U.S. Dollars, we could experience a significant decline in sales or experience collection problems in the event the U.S. Dollar becomes more expensive relative to local currencies.

A substantial portion of our international sales are denominated in U.S. Dollars. As a result, if the U.S. Dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. Such conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. Dollars.

If we deliver systems with defects, our credibility may be harmed, sales and market acceptance of our systems may decrease and we may incur liabilities associated with those defects.

Our systems are complex and sometimes have contained errors, defects and bugs when introduced. If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems could be harmed. Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to commercial and/or product liability as a result of lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems. Our product and commercial liability policy currently provides only limited coverage per claim. In the event of a successful product liability and/or commercial claim, we could be obligated to pay damages which are not covered by that insurance or which are significantly in excess of our insurance limits.

Our backlog may not result in future net sales.

We schedule the production of our systems based in part upon order backlog. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. In addition, while we evaluate each customer order on a case by case basis to determine qualification for inclusion in backlog, there can be no assurance that amounts included in backlog will ultimately result in future sales. A reduction in backlog during any particular period, or the failure of our backlog to result in future sales, could harm our business, financial condition, results of operations and cash flows.

We have experienced periods of rapid growth and if we are not able to successfully manage these growth periods, our business, financial condition and results of operations could be significantly harmed.

We have experienced periods of significant growth in net sales. Our net sales increased 7.1% from approximately $239.4 million during the fiscal year 2000 to approximately $256.5 million during fiscal year 2001. In addition, our consolidated orders backlog decreased 64.8% from approximately $110.2 million at September 30, 2000 to $38.8 million at September 30, 2001. We cannot assure you we will be able to continue to maintain or increase the level of net sales in future periods. If we are unable to effectively manage sales growth, our business, financial condition, results of operations and cash flows could be significantly harmed.

We currently do not maintain a credit facility but rely on cash reserves and cash flow to finance our operations.

We elected not to renew our $40 million credit facility in October 2001 and decided to rely on our cash reserves and expected cash flow to finance our operations. If there is a future need for a credit facility to finance current operations or growth, there is no assurance that we will be able to obtain a suitable facility at that time.

Our stock price may be volatile and our common stock may be thinly traded, which could cause investors to lose a substantial part of their investments in our common stock.

The stock market in general, and the stock prices of technology companies in particular, have experienced volatility which has often been unrelated to the operating performance of any particular company or companies. If market or industry-based fluctuations continue, our common stock price could decline regardless of our actual operating performance and investors could lose a substantial part of their investments. The market price of our common stock will likely fluctuate in response to a number of factors, including the following:

variations in our operating results;

announcements by us or our competitors of significant contracts or acquisitions;

our failure to meet management guidance on financial performance or the performance estimates of securities analysts;

changes in financial estimates of our net sales and operating results by management or securities analysts;

stock market price and volume fluctuations attributable to inconsistent trading volume levels; and

general stock market conditions.

We could be subject to class action litigation due to stock price volatility, which, if it occurs, will distract our management and could result in substantial costs or large judgments against us.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause harm to our business, financial condition, results of operations and cash flows.

Item 2. Properties

We have two manufacturing facilities located on sites in Kalispell, Montana with approximately 200,000 square feet in the aggregate. We also own a building and land located in Coopersburg, Pennsylvania, which serves as a manufacturing facility for our Rhetech, Inc. subsidiary. We believe that our existing manufacturing facilities will be adequate to meet our requirements for the foreseeable future and that suitable additional or substitute space will be available as needed. During fiscal 2001 we sold land and buildings that we owned in Cambridge, UK. We are currently constructing an office building on land retained at that location. We also lease 17 other smaller facilities worldwide, which are used as sales and customer service centers.

We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals used on Semitool’s premises. We believe that we are in material compliance with these regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, current or future regulations could require us to purchase expensive equipment or to incur other substantial expenses to comply with environmental regulations. Any failure by us to control the use of, or adequately restrict the discharge or disposal of, hazardous substances could subject us to future liabilities, result in fines being imposed on us, or result in the suspension of production or cessation of our manufacturing operations.

Item 3. Legal Proceedings

On June 11, 2001, the Company filed separate suits against Applied Materials, Inc., (Case No. CV-01-1066 AS), Novellus Systems, Inc. (Case No. CV-01-874 KI) and Ebara Corporation and Ebara Technologies, Inc. (Case No. CV-01-873 BR). The suits against all three parties are in the United States District Court for the District of Oregon. The suit against Applied Materials initially was filed in the United States District Court for the Northern District of California, withdrawn, and refiled in the District Court for the District of Oregon on July 12, 2001. The suits allege infringement of Semitool’s U.S. Patent 6,197,181 (Chen) “Apparatus and Method for Electrolytically Depositing a Metal on a Microelectronic Workpiece” (‘181 Patent) and seek injunctive relief, damages for past infringement and increased damages for willful infringement. Each defendant has answered our complaints denying the claims and seeking to have the patent declared invalid.

In addition, Novellus, by a motion dated October 18, 2001, amended its counterclaim seeking a declaration of the invalidity of our ‘181 Patent with separate allegations of our infringement of four of their patents: viz., U.S. Patent 6,179,983 “Method and Apparatus for Treating Surface Including Virtual Anode”; U.S. Patent 6,074,544 “Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain Uniform Plated Layer”; U.S. Patent 6,110,346 “Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain Uniform Plated Layer”; and U.S. Patent 6,162,344 “Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass Transfer to Obtain Uniform Plated Layer”. The counterclaims seek injunctive relief, damages for past infringement, increased damages for willful infringement and attorneys’ fees. We believe that the counterclaims are without merit and are contesting the action vigorously. However, given the inherent uncertainty of litigation, there can be no assurance that the ultimate outcome with be in our favor. If Novellus were to prevail in its counterclaims, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, regardless of the ultimate outcome, there can be no assurance that the diversion of management’s attention, and any costs associated with any of the lawsuits, will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

In August 1998, the company filed suit against Novellus Systems, Inc. in the United States District Court for the Northern District of California (Case No. C-98-3089 DLJ), alleging infringement of two of our patents relating to single substrate processing tools used in electrochemical deposition of copper onto semiconductor wafers. We sought damages for past infringement, a permanent injunction, treble damages for willful infringement, prejudgment interest and attorneys’ fees. Novellus filed a motion for summary judgment of noninfringement, which motion was granted on March 17, 2000 and judgment was subsequently entered on May 12, 2000 dismissing the case. We filed an appeal to the United States Court of Appeals for the Federal Circuit on May 15, 2000 seeking review of the ruling on the motion for summary judgment. On June 8, 2001, the United States Court of Appeals for the Federal Circuit upheld the District Court’s dismissal of the case based on a motion for summary judgment. On September 10, 2001 we filed a Petition for Writ of Certiorari with the United States Supreme Court to review the judgment of the Court of Appeals. The parties are awaiting the decision of the Supreme Court on the Petition. If the Supreme Court denies the Petition, it is the opinion of management that the denial of the Petition and the final dismissal of this case will not have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

We are subject to other legal proceedings and claims which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of our management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to the shareholders for a vote during the fourth quarter of the fiscal year.

PART II

Item 5. Market for Semitool's Common Stock and Related Shareholder Matters

Our Common Stock is traded under the symbol “SMTL” principally on the Nasdaq National Market. The approximate number of shareholders of record at December 17, 2001 was 131 and the reported last sale price on that date of our common stock on the Nasdaq National Market was $11.59. The high and low sales prices for our common stock reported by the Nasdaq National Market are shown below.


                                      Common Stock Price Range
                                             Fiscal Year
                                         Ended September 30,
                                 2001                           2000
                          High          Low             High             Low
First Quarter            $13.31        $8.19            $7.81           $4.00
Second Quarter           $14.50        $7.69           $26.63           $6.75
Third Quarter            $13.22        $7.19           $21.75          $11.13
Fourth Quarter           $14.29        $8.15           $19.25           $9.88

Since our initial public offering of Common Stock in February of 1995, the Company has never declared or paid any cash dividend nor has any intent to do so in the near future.

Item 6. Selected Financial Data

This summary should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein.

Summary Consolidated Financial Information
(in thousands, except per share data)


                                                                        Year Ended September 30,
                                                      2001(2)         2000         1999         1998          1997

Statement of Operations Data:
Net sales                                             $256,467     $239,447     $122,528     $180,501      $193,952
Gross profit                                           128,092      126,701       57,648       90,979        91,090
Income (loss) from operations                           32,509       36,669      (12,741)       8,087        20,432
Gain on sale of subsidiary(1)                           31,054           --           --           --            --
Net income (loss) before cumulative effect of
  change in accounting principle                        43,258       24,426       (6,745)       4,805        12,523
Cumulative effect of change in accounting
  principle (net of tax)(2)                            (17,645)          --            --          --            --
Net income (loss)                                       25,613       24,426       (6,745)       4,805        12,523
Basic earnings (loss) per share                           0.90         0.87        (0.24)        0.17          0.46
Diluted earnings (loss) per share                         0.89         0.85        (0.24)        0.17          0.45
Average number of basic common shares                   28,333       28,062       27,594       27,566        27,352
Average number of diluted common shares                 28,769       28,783       27,594       27,808        27,666

Balance Sheet Data:
Cash and marketable securities                          46,837        6,711        4,789        7,278         5,060
Working capital                                        106,730       79,498       52,308       52,408        50,047
Total assets                                           200,090      202,660      131,884      127,990       131,725
Short-term debt                                          1,192       21,724       10,541        3,596         4,393
Long-term debt and capital leases                        3,265        3,653        3,911        3,836         3,364
Shareholders' equity                                   133,199      108,632       81,025       86,694        81,580

(1) The Company sold its wholly-owned subsidiary, Semy Engineering, Inc., on February 16, 2001.

(2) The cumulative effect is the result of the Company adopting the Securities and Exchange Commission's Staff Accounting Bulletin (SAB 101), "Revenue Recognition in Financial Statements." Data to reflect the change in accounting principle in accordance with SAB 101 are not available to restate financial information for fiscal years prior to 2001.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Semitool designs, manufactures, installs and services its high performance wet chemical processing equipment for use in the fabrication of semiconductor devices. Our primary suites of tools include electrochemical deposition systems and wet chemical processing systems for wafer cleaning, stripping and etching. Electrochemical deposition applications include plating of copper and gold for IC device interconnects, solder and gold bumps for wafer level packaging and other metals such as nickel and platinum for specialty uses. Typically, there are more than 350 manufacturing steps in fabricating semiconductor devices. After many of these steps a cleaning, stripping or etching process, including polymer removal, photoresist strip, metal etching, wafer backside cleaning and critical cleaning is required. Our suite of tools for these applications are based on wet spray technologies delivered by automated and semi-automated platforms.

We provide worldwide sales, service and support primarily through our employees located in regional offices in the United States, Europe, Japan, Korea, and Singapore and through independent sales organizations for certain products in Taiwan, Japan and China. In fiscal 2001, our geographic sales distribution was as follows: United States, 36.2%, Europe, 26.1%, Japan, 15.7% and Asia and all others, 22.0%. We expect that international sales will continue to account for a significant portion of net sales, particularly in Asia with the industry trend to semiconductor device outsourcing to foundries in that region, although the percentage of international sales and the geographic distribution may fluctuate from period to period.

Results of Operations

The following table sets forth our consolidated results of operations for the periods indicated expressed as a percentage of net sales:


                                                                      Year Ended September 30,
                                                               --------         --------          --------
                                                                 2001             2000              1999
                                                               --------         --------          --------
Statement of Operations Data:
     Net sales                                                    100.0%           100.0%            100.0%
     Cost of sales                                                 50.1             47.1              53.0
                                                               --------         --------          --------
     Gross profit                                                  49.9             52.9              47.0
                                                               --------         --------          --------

     Operating expenses:
         Selling, general and administrative                       26.5             27.8              40.4
         Research and development                                  10.7              9.8              17.0
                                                               --------         --------          --------
         Total operating expenses                                  37.2             37.6              57.4
                                                               --------         --------          --------
     Income (loss) from operations                                 12.7             15.3             (10.4)
     Other income (expense), net                                    1.1             (0.3)              1.5
     Gain on sale of subsidiary (1)                                12.1               --                --
                                                               --------         --------          --------
     Income (loss) before income taxes and
       cumulative effect of change in accounting principle         25.9             15.0              (8.9)
     Income tax provision (benefit)                                  9.0              4.8              (3.4)
     Cumulative effect of change in accounting
       principle, net of tax benefit (2)                           (6.9)              --                --
                                                               --------         --------          --------
     Net income (loss)                                             10.0%            10.2%             (5.5)%
                                                               ========         ========          ========

(1) The Company sold its wholly-owned subsidiary, Semy Engineering, Inc., on February 16, 2001.

(2) The cumulative effect is a result of the Company adopting the Securities and Exchange Commission's Staff Accounting Bulletin (SAB 101), "Revenue Recognition in Financial Statements." Data to reflect the change in accounting principle in accordance with SAB 101 are not available to restate financial information for fiscal years prior to 2001.

Results of Operations for the Fiscal Years Ended September 30, 2001, 2000 and 1999

In December 1999, the staff of the Securities and Exchange Commission (SEC) issued staff accounting bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” During the fourth quarter of fiscal 2001, the Company adopted SAB 101 retroactive to October 1, 2000. Under this method, revenue is recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured. Sales of new products to new or existing customers are not recognized until customer acceptance. Likewise, sale of existing products to new customer environments are not recognized until acceptance. Whereas, sales of existing products into existing customer environments are treated as multiple element arrangements if multiple elements exist. The amount of revenue recognized in multiple element arrangements is the lesser of the fair value of the equipment or the contracted amount that was due upon title transfer. The revenue for elements other than equipment is recorded in deferred profit and is recognized when the remaining goods and/or services are delivered or performed. Revenue related to service is recognized upon completion of performance of the service or ratably over the life of the related service contract. Spare parts sales are recognized upon shipment.

As a result of implementing SAB 101, the Company changed its method of accounting for revenue recognition. This change resulted in a cumulative deferred revenue of $57.8 million as of October 1, 2000, which was recorded as a non-cash charge of $17.6 million (after reduction for income taxes of $8.7 million), or a charge of $0.61 per share, to reflect the cumulative effect of the accounting change as of the beginning of fiscal 2001. The deferred profit balance as of October 1, 2000 was $26.3 million. Deferred profit equals the amount of system revenue that was shipped, but deferred under SAB 101 less all applicable product, warranty and commission costs. Of the $26.3 million in deferred profit, the full amount was recognized in fiscal 2001. The results for the first three quarters of fiscal year ended September 30, 2001 have been restated in accordance with SAB 101 (as shown in Note 4 to the Consolidated Financial Statements). Data to reflect the change in accounting principle in accordance with SAB 101 are not available to restate financial information for the periods before October 1, 2000. The change in revenue recognition does not affect the Company's cash flow.

Prior to June 30, 2001, the Company's revenue recognition policy was to recognize revenue at the time of shipment to the customer. Customer service contract revenue was recognized ratably over the life of the contract.

Prior to the sale of the Company's wholly-owned subsidiary, Semy Engineering, Inc., software revenue was recognized when there was persuasive evidence of an arrangement, the software had been delivered, the price was fixed and determinable, and collectibility was probable in accordance with the AICPA's Statement of Position 97-2 "Software Revenue Recognition."

Net Sales. Consolidated net sales were $256.5 million for fiscal 2001 compared to consolidated net sales for fiscal 2000 and 1999, which were reported on the historical shipment method of revenue recognition, of $239.4 million and $122.5 million, respectively. Fiscal year 2001 shipments totaled $236.9 million.

Semiconductor Equipment Net Sales. Fiscal 2001 semiconductor equipment net sales were $249.0 million compared to net sales for fiscal 2000 and 1999, which were reported on the historical shipment method of revenue recognition, of $221.8 million, and $109.6 million, respectively. Fiscal 2001 shipments of semiconductor equipment totaled $229.4 million. Fiscal 2001 shipments increased $7.6 million as a result of increased shipments of our automated multi-wafer batch and single-wafer cleaning, stripping and etching equipment, partially offset by a decline in electrochemical deposition equipment shipments. Relative contributions to semiconductor equipment net sales by product line for fiscal 2001 were 21.2% for electrochemical deposition, 64.1% for cleaning, stripping and etching and 14.7% for parts, service and other. The relative contributions to fiscal 2000 semiconductor equipment net sales by product line was 23.5% for electrochemical deposition, 60.4% for cleaning, stripping and etching and 16.1% for parts, service and other.

Semiconductor equipment net sales for fiscal 2000 were $221.8 million, slightly more than double fiscal 1999's net sales level, as a result of an increase in net sales in all product categories. Demand for electrochemical deposition and automated multi-wafer batch cleaning, stripping and etching equipment was particularly strong. Electrochemical deposition equipment net sales were $52.2 million, an increase of $31.8 million over fiscal 1999.

Software Control Systems Net Sales. In February 2001, the Company sold Semy Engineering, Inc., the sole component of its software controls systems segment, to Brooks Automation, Inc. for $33.3 million in cash and 73,243 shares of Brooks Automation, Inc. common stock and realized an after-tax gain of $19.6 million. Software Control Systems net sales for fiscal years 2001, 2000 and 1999 were $7.4 million, $17.6 million, and $12.9 million, respectively.

Orders backlog decreased 64.8% to $38.8 million at September 30, 2001 compared to $110.2 million as of September 30, 2000. Orders are generally subject to cancellation or rescheduling by customers with limited or no cancellation fees. As a result of the industry downturn, we experienced both cancellations and the forward rescheduling of equipment delivery dates by customers. Because of these factors and orders placed and shipped in the same quarter, our orders backlog is not necessarily indicative of actual revenue for any succeeding period.

Under the SAB 101 method of revenue recognition, certain revenues are deferred and recognized as revenue upon customer acceptance. Deferred revenue at September 30, 2001 was $38.2 million. We expect to recognize all of this deferred revenue in fiscal 2002.

The continued semiconductor market weakness limits our market visibility; however, it is likely that the Company will have substantially lower sales in fiscal 2002.

Gross Profit. Our gross margin for fiscal 2001 was 49.9%, compared to 52.9% and 47.0% in fiscal 2000 and 1999, respectively. The decline in gross margin from fiscal 2000 to 2001 is attributable to lower absorption of fixed costs during the second half of fiscal 2001, as a result of the industry downturn and sales mix. Our gross margin has been and we believe will continue to be affected by a variety of factors, including the cost to manufacture, service and support new and enhanced products, the mix and average selling prices of products sold and operating level. In fiscal 2001's fourth quarter, our sales volume and gross margin were sequentially lower than the previous quarter. Based on our expectation that our fiscal 2002 revenue will be substantially lower than the prior year, we expect our gross margin will continue to be subject to downward pressure in fiscal 2002.

The gross margin increase from fiscal 1999 to fiscal 2000 was primarily attributable to our higher capacity utilization, lower warranty cost as a percent of net sales, and product sales mix.

Selling, General and Administrative. Selling, general and administrative expenses were $68.0 million, $66.6 million and $49.5 million for fiscal 2001, 2000 and 1999, respectively. As a percent of net sales, selling, general and administrative expenses were 26.5%, 27.8% and 40.4% for fiscal 2001, 2000 and 1999, respectively. The increase in absolute dollars in selling, general and administrative expenses in fiscal 2001 compared to fiscal 2000 is primary due to increased sales commissions due to higher net sales and geographical mix of sales.

Selling, general and administrative expenses decreased as a percent of sales from fiscal 1999 to 2000 because we were able to leverage the fixed components of these expenses as sales increased. The increase in absolute dollars in selling, general and administrative expenses of $17.1 million in fiscal 2000 compared to fiscal 1999 was a result of higher staffing and commission costs related to the higher level of sales.

Research and Development. Research and development expenses were $27.5 million, $23.4 million and $20.9 million for fiscal 2001, 2000 and 1999, respectively. As a percent of sales, research and development expenses were 10.7%, 9.8% and 17.0% for fiscal 2001, 2000 and 1999, respectively. The increase in R&D costs between fiscal 2001 and 2000 was due mainly to the development of 300mm tools, further enhancements across the product lines, and included new software and hardware control systems, new robotic automation systems, and the development of our ACMS product line which provide automated chemical management for our plating systems.

The $2.6 million increase in absolute dollars in research and development in fiscal 2000 from fiscal 1999 was a result of research and development for 300mm product applications, enhancements to electrochemical deposition technologies and a higher development level associated with the increased sales activity. As a percent of sales, fiscal 2000's spending level was more in line with historical spending levels.

Other Income (Expense), Net. Other income (expense), net was income of $2.9 million for fiscal 2001, expense of $749,000 for fiscal 2000, and income of $1.8 million for fiscal 1999. Major income components were the gain on the sale of the Cambridge U.K. building and land, and interest income of approximately $1.1 million for fiscal 2001. In fiscal 2001, 2000 and 1999 other income, net included foreign exchange gains of $203,000, $407,000 and $1.2 million, respectively. Interest expense was approximately $104,000, $1.1 million and $401,000 in fiscal 2001, 2000 and 1999, respectively. The foreign exchange gain consisted of net gains and losses resulting from the re-measurement of our accounts denominated in non-U.S. currencies into U.S. Dollars, which is our functional currency, and net gains and losses on forward contracts not designated as hedges. The net exchange gains were due primarily to fluctuations of the U.S. Dollar against the Japanese Yen.

Income Taxes. The fiscal 2001 income tax provision was $23.2 million compared to a $11.5 million tax provision in fiscal 2000 and a $4.2 million income tax benefit for fiscal 1999. The effective income tax rates for fiscal 2001, 2000 and 1999 were 34.9%, 32.0% and 38.4%, respectively. The anticipated tax rate for fiscal 2002 is 34.0%.

Liquidity and Capital Resources

Cash and cash equivalents at September 30, 2001 were $39.9 million up from $6.7 million at the beginning of the year. During fiscal 2001, cash provided by operations was $26.9 million, which contrasts with fiscal 2000 when cash used by operations was $4.1 million. The year-over-year change in cash provided by operations is attributable to the declining level of sales and operations due to the semiconductor industry downturn that began in fiscal 2001. In fiscal 2001 cash provided by operations was primarily the result of decreases in accounts receivable and inventory, which were partially offset by decreases in accounts payable and other current liabilities reflecting lower sales and operating levels due to the industry downturn. In fiscal 2000, the semiconductor industry was in a strong growth phase and the company's fiscal 2000 net sales grew to more than twice the fiscal 1999 level. As a result of this growth, cash used in operations was primarily the result of increases in accounts receivable and inventory to support the sales growth, but that increase was partially offset by higher net income and increases in accounts payable and other current liabilities.

As of September 30, 2001, we had accounts receivable of $51.6 million and inventory of $52.9 million as compared to $78.5 million and $72.5 million respectively as of September 30, 2000. We expect future accounts receivable and inventory balances to fluctuate with net sales. As is customary in the semiconductor manufacturing equipment industry, products are generally built to fill specific customer orders, with typical order fulfillment times ranging from four to six weeks for certain products to six months or more for more complex products. Accordingly, while our finished goods inventory accounts for 13.4% of total inventory at September 30, 2001, overall inventory levels tend to fluctuate with the level and type of orders received. Currently, the tools with the longest average cycle times are the automated batch and single-wafer processing tools. We expect inventory levels to decline somewhat as sales decline and then increase as new order bookings increase.

Cash provided by investing activities for fiscal 2001 was $26.6 million as compared to cash used in investing activities of $7.0 million for the year ended September 30, 2000. The sale of Semy Engineering, Inc. during fiscal 2001 provided $33.3 million in cash proceeds. Cash used to purchase plant, property and equipment in fiscal 2001 was $4.5 million with $4.8 million transferred from inventory, compared to $5.4 million in fiscal 2000. Cash used for investments in intangible assets, which primarily consisted of intellectual property rights, was approximately $1.9 million in fiscal 2001 as compared to $1.7 million for fiscal 2000.

Cash used in financing activities for fiscal 2001 consisted of net repayments on short-term borrowings of $20.4 million and the repayment of approximately $340,000 on long-term debt and capitalized leases. Proceeds from the exercise of stock options provided $560,000 in cash. This compares with financing activities for fiscal 2000 of cash provided by the exercise of stock options of $3.1 million and $10.3 million of additional net borrowings under our line of credit and other short-term debt to fund operations and repayments on long-term debt and capital leases of $405,000.

As of September 30, 2001, our principal sources of liquidity consisted of approximately $39.9 million of cash and cash equivalents and $6.9 million in marketable securities.

We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations to meet operating expenses and planned capital expenditures through fiscal 2002. In October 2001, we elected not to renew our $40 million revolving credit facility and decided at that time to rely on our cash reserves and expected cash flows to finance our operations and planned capital expenditures. We currently have an effective "shelf" registration statement which registers the offer and sale of up to an aggregate $75 million of our securities. If additional financial resources are required in the future, we expect either to issue securities from the "shelf" registration statement, to issue other financial instruments or to obtain a suitable credit facility, whichever management deems advisable. However, there can be no assurance that in the future we will be able to issue additional common stock or other financial instruments or that we will be able to obtain a credit facility on acceptable terms.

Litigation

We currently are involved in patent litigation which is described in "Legal Proceedings". Although we are not aware of any infringement by our products of any patents or proprietary rights of others (other than as alleged by Novellus, Inc. and described in "Legal Proceedings"), further commercialization of our products could provoke claims of infringement from third parties. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any such litigation, including the litigation in which we currently are engaged, could result in substantial cost and diversion of effort by us, which by itself could have a material adverse effect on our business financial condition, results of operations and cash flows. Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities and damages to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could harm our business, financial condition, results of operations and cash flows.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS 141 and SFAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS 141 will be reclassified to goodwill. Companies are required to adopt SFAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company does not expect the adoption of SFAS 141 and 142 to have a significant impact on its financial position, results of operations and cash flows.

In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability due to passage of time or changes in the amount or timing of estimated cash flows is recognized as an accretion expense. The Company will be required to adopt this statement no later than October 1, 2003. The Company does not expect the adoption of this statement to have a significant impact on its results of operations, financial position and cash flows.

In October of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for fiscal years beginning after December 15, 2001. This statement supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." However, it retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Impairment of goodwill is not included in the scope of SFAS No. 144 and will be treated in accordance with the accounting standards established in SFAS No. 142, "Goodwill and Other Intangible Assets." According to SFAS No. 144, long-lived assets are to be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations. The statement applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of segments of a business. The Company will be required to adopt this statement no later than October 1, 2002. The Company is currently assessing the impact of this statement on its results of operations, financial position and cash flows.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

Market Risks

Market risks relating to our operations result primarily from changes in interest rate and changes in foreign currency exchange rates.

As of September 30, 2001, we had approximately $3.6 million in long-term debt and approximately $839,000 in short-term debt. Our long-term debt bears interest at a fixed rate. As a result, changes in the fixed rate interest market would change the estimated fair value of the fixed rate long-term debt. We believe that a 10% change in the long-term interest rate would not have a material effect on our business, financial condition, results of operations or cash flows.

All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. We manage this risk and attempt to reduce such exposure through an economic hedge using short-term forward exchange contracts. At September 30, 2001, we held forward contracts to sell Japanese Yen with a face value of $5.7 million, a market value of $5.6 million and an unrealized gain of approximately $80,000. However, the impact of movements in currency exchange rates on forward contracts is offset to the extent of receivables denominated in Japanese Yen. The effect of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange contracts and the underlying transactions would not be material to our financial condition, results of operations or cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Item 8. Financial Statements and Supplementary Data

SEMITOOL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
(Amounts in Thousands, Except Share Amounts)


                                                       ASSETS
                                                                                            2001            2000
                                                                                        -----------     -----------
Current assets:
   Cash and cash equivalents                                                            $    39,890     $     6,711
   Marketable securities                                                                      6,947              --
   Trade receivables, less allowance for doubtful accounts
      of $289 and $314 in 2001 and 2000                                                      51,578          78,486
   Inventories                                                                               52,914          72,467
   Income tax refund receivable                                                               1,002           1,055
   Prepaid expenses and other current assets                                                  2,936           2,237
   Deferred income taxes                                                                     12,030           7,235
                                                                                        -----------     -----------
         Total current assets                                                               167,297         168,191
Property, plant and equipment, net                                                           27,555          29,915
Intangibles, less accumulated amortization of $561 and $4,605 in 2001 and 2000                4,708           3,843
Other assets, net                                                                               530             711
                                                                                        -----------     -----------
         Total assets                                                                   $   200,090     $   202,660
                                                                                        ===========     ===========

                                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Note payable to bank and other short-term debt                                       $       839     $    21,383
   Accounts payable                                                                          10,973          28,246
   Accrued commissions                                                                        3,142           2,523
   Accrued warranty and installation                                                          9,162          13,701
   Accrued payroll and related benefits                                                       6,070           8,154
   Income taxes payable                                                                       2,643           8,722
   Other accrued liabilities                                                                  2,593           2,624
   Customer advances                                                                          3,079           2,938
   Deferred profit                                                                           21,711              --
   Long-term debt and capital leases, due within one year                                       353             341
   Payable to shareholder                                                                         2              61
                                                                                        -----------     -----------
         Total current liabilities                                                           60,567          88,693
Long-term debt and capital leases, due after one year                                         3,265           3,653
Deferred income taxes                                                                         3,059           1,682
                                                                                        -----------     -----------
         Total liabilities                                                                   66,891          94,028
                                                                                        -----------     -----------

Commitments and contingencies (Note 9)

Shareholders' equity:
   Preferred stock, no par value, 5,000,000 shares authorized, no
      shares issued and outstanding                                                              --              --
   Common stock, no par value, 75,000,000 shares authorized,
      28,380,117 and 28,306,500 shares issued and outstanding in 2001 and 2000               45,181          44,621
   Retained earnings                                                                         89,048          63,435
   Accumulated other comprehensive income (loss)                                             (1,030)            576
                                                                                        -----------     -----------
         Total shareholders' equity                                                         133,199         108,632
                                                                                        -----------     -----------
         Total liabilities and shareholders' equity                                     $   200,090     $   202,660
                                                                                        ===========     ===========